'I don't even notice the money is gone': Pay 'sacrifice' could save you hundreds of pounds a year

Tax gain: The Long family give £50 a month to a charity for the homeless

Millions of workers are missing out on the chance to save tax while spending money, using a little known scheme called ‘salary sacrifice’.

Parents can save around £900 a year each on childcare under the scheme, which is essentially a way to pay free of tax. Employees can also shop or donate to charity in exchange for a chunk of their wage before tax is stripped away, in the same way that pension contributions are made.

But while companies are likely to offer a pension, few offer the other benefits available under salary sacrifice.

Cycle-to-work schemes, bus passes for commuters, canteen tokens, staff car parking and vouchers for shopping are all examples of how the scheme can help you save money – via tax relief – on things that would be bought anyway.

The Government launched a consultation last year into ‘payroll giving’ – one of the major benefits under the umbrella of salary sacrifice. The aim is to promote the system that allows monthly charitable donations to be taken from your salary before tax and National Insurance. This boosts the value of charitable donations.

According to research commissioned by the Charities Aid Foundation, improving the scheme could put an extra £175 million a year into the pockets of underfunded charities.

Nearly a third of people surveyed say they would be likely to give via their payroll if possible. But fewer than 8,500 out of Britain’s 4.8 million employers offer this to staff.

Martin Long is a project director at a management consultancy. He pays £50 a month to Centrepoint, a central London-based charity for homeless young people.

Martin, 53, lives in Wimbledon, South West London, with his wife Jane, 45, who works part-time as a church administrator, and their two children Nicholas, 9, and Michael, 6.

He says: ‘I knew there were tax advantages for the charity when I signed up. I don’t even notice the money is gone because it leaves my salary before it gets to my bank account.’ Martin chose Centrepoint because his family has a long history of supporting youth clubs.

How everything adds up

The more you pay in tax the less you pay from after-tax salary towards the same charitable donation.

But whatever tax you pay, salary sacrifice can mean savings.

Here’s a simplified example of how:

A basic-rate taxpayer who wants to contribute £20 a month to charity will pay nearly £16 from net salary.

A higher-rate taxpayer contributing the same amount has some £12 taken from their monthly pay packet under the salary sacrifice scheme, but the charity still gets £20.

Additional rate taxpayers give up only £11 but the charity receives nearly double.

Charitable giving is just one of the many options under salary sacrifice. Often parents use it to save when paying for childcare.

A lump sum is ‘sacrificed’ in return for a ‘non-cash benefit’ of vouchers, which are paid directly to a nursery or child minder. From 2015, 2.5 million parents could claw back £1,200 in childcare costs for each child under plans announced in March.

But some parents may be better off staying with their employer’s salary sacrifice scheme – for example if they are not eligible for the new arrangement, which will only be given to two-parent families if both parents are working.

Salary sacrifice can also help control how much income tax is handed to the State if earnings hover just above a tax band threshold.

Workers start paying 40 per cent income tax when they earn more than £41,451, including the personal allowance, and the additional 45 per cent tax band rate once earnings top £150,000.

Check first because it doesn’t help everyone

CALCULATE how much money you thinkyou can sacrifice without giving up rights to other benefits, such as the state pension or tax credits. For more information visit the HMRC website

RECOMMEND your employer sets up a salary sacrifice scheme if it does not already offer one.

Speak to the HR team and explain what you might like to use the scheme for. If it is payroll giving, an example of how it works can be found on the Centrepoint charity website at centrepoint.org.uk/donate.

Patrick Connolly, of independent financial adviser Chase de Vere, based in Bath, says: ‘Salary sacrifice can reduce your effective income level to below a tax band rate, perhaps stopping you breaching the higher rate income tax threshold and protecting your personal income tax allowance or maintaining your eligibility for child benefit.’

It is not right for everyone – especially lower-paid workers. Salary sacrifice effectively reduces earnings, which may have unintended consequences affecting mortgage applications or eligibility for tax credits and the state pension.

This is because an employee pays less towards National Insurance and it is these contributions that determine the level of some State benefits.

But Connolly says the majority will benefit from salary sacrifice. He adds: ‘Your employers will also make savings as they will pay less for National Insurance Contributions on your salary.’